Performance-related Pay in the Public Sector : A Review of Theory and Evidence

Abstract

The objective of this paper is to
 provide a review of the theoretical and, in particular,
 empirical literature on performance-related pay in the
 public sector spanning the fields of public administration,
 psychology, economics, education, and health with the aim of
 distilling useful lessons for policy-makers in developing
 countries. This study to our knowledge is the first that
 aims to disaggregate the available evidence by: (i) the
 quality of the empirical study; (ii) the different public
 sector contexts, in particular the different types of public
 sector jobs; and (iii) geographical context (developing
 country or OECD settings). The paper's main findings,
 based on a comprehensive review of 110 studies of public
 sector and relevant private sector jobs are as follows.
 First, we find that overall a majority (65 of 110) of
 studies find a positive effect of performance-related pay,
 with higher quality empirical studies (68 of the 110)
 generally more positive in their findings (46 of the 68).
 These show that explicit performance standards linked to
 some form of bonus pay can improve, at times dramatically,
 desired service outcomes. Second, however, these more
 rigorous studies are overwhelmingly for jobs where the
 outputs or outcomes are more readily observable, such as
 teaching, health care, and revenue collection (66 of the
 68). There is insufficient evidence, positive or negative,
 of the effect of performance-related pay in organizational
 contexts that that are similar to that of the core civil
 service, characterized by task complexity and the difficulty
 of measuring outcomes, to reach a generalized conclusion
 concerning such reforms. Third, while some of these studies
 have shown that performance-related pay can work even in the
 most dysfunctional bureaucracies in developing countries,
 there are too few cases to draw firm conclusions. Fourth,
 several observational studies identify problems with
 unintended consequences and gaming of the incentive scheme,
 although it is unclear whether the gaming results in an
 overall decline in productivity compared to the
 counterfactual. Finally, few studies follow up
 performance-related pay effects over a long period of time,
 leaving the possibility that the positive findings may be
 due to Hawthorne Effects, and that gaming behavior may
 increase over time as employees become more familiar with
 the scheme and learn to manipulate it.